Digital Verdure

Assuming you were suddenly given $10,000 for home improvements, which of the following would you do?

• Remodel Kitchen or Bathroom
• Replace carpet or add hardwood or tile
• Replace windows
• Repaint roof
• Repaint interior or exterior
• Replace hot water heater
• Add insulation
• Finish out basement or bonus space

If you picked kitchen/bathroom and floors as your first and second choices, welcome to the club. You chose the same as a majority of consumers, according to the Shelton Group's EnergyPulse survey, released this week.

Here’s another question: did you factor the home improvement’s ROI in your decision?

That’s actually a concern for many homeowners when it comes time to invest in remodeling, yet it’s not clear today which option leads to greater resale value and why. Homebuyers are a finicky bunch and may pay more for marble counter-tops than a high efficiency hot water heater, even though the latter pays for itself in energy savings in just a few years.  Of course, a home buyer isn’t going to throw a housewarming party in her basement to show off her new EnergyStar boiler… but how much cash does a boiler need to save before it wins investment over sexier renovations?

A heck of a lot, according to energy efficiency experts, who note that consumers are very irrational when it comes to home improvement decisions. In the latest example, the Shelton Group found that consumers would endure up to $129/month increase in utility bills before investing in energy efficiency renovations, demonstrating what Shelton Group calls the “Apathy Gap – the price people are willing to pay to do nothing.”

The Apathy Gap

The Apathy Gap is notorious among energy policymakers and economists, who cite the average consumer’s ridiculously high internal discount rate for energy efficient projects – as high as 70 – 80% in a recent study by Efficiency Vermont. By comparison, most consumers extend a 5% discount rate to Uncle Sam when buying US Treasury bonds. Do people really think that investing in retrofits (essentially the laws of physics, as proofed in building science, plus some installation risk) is 16 times more risky than the Federal Government?

The Apathy Gap is extremely irrational. In Predictably Irrational, Dan Ariely asks, “Why do people splurge on a lavish meal, but cut coupons to save twenty-five cents on a can of soup?” Similarly, energy efficiency advocates should ask, “why do house hunters scrutinize mortgage rates, but ignore utility bills?”

In both cases, the reason is that consumers make decisions emotionally, in conformity with social norms. Bank and broker advertising have taught home buyers to rate compare, but no one has shown them how to negotiate on utility bills. Around Boston, where I live, a winter heating bill may only be a few dollars shy of a monthly mortgage payment. Installing an efficient boiler can lower a heating bill by tens of thousands of dollars over the 30 year span of a typical mortgage. Yet many home buyers would discount that payback so much as to make the boiler less valuable than the marble countertops.

There are similar forces at work across the full range of residential energy efficiency products and services. Even low-cost and no-cost behavioral changes, like replacing lights with free CFLs or running dishwashers at night, have unreasonably high hurdles to adoption given their easy savings.

Roadblocks on the Bridge

We need to bridge the Apathy Gap and we should start by clearing the major roadblocks: the reality that energy efficiency is not a social norm and the perception of energy efficiency as a “Big Brother” utility-backed priority. There are others, but these are particularly bad because they are fundamental obstacles to consumer recognition and internalization of energy efficiency priorities and because they can be broken down with the cost-effective digital media and social marketing strategies.

Energy efficiency is NOT a social norm

Consumers make decisions that align with social norms while home energy consumption largely exists in a vacuum. We don’t behave as if home energy is a scarce resource today because it has been delivered “cheap, reliable and plentiful” to us for generations. Obviously this needs to change if we are going to become a more energy efficient society.

Interestingly, academic research shows, and social marketing experience validates, that the most effective way to get consumers to change their behavior is to demonstrate that others like them already have. There are many ways to do this (see the “Big Brother” point below), but the most effective enable consumers to tell their own stories of becoming energy efficient on a real-time ongoing basis, ideally to a target audience that closely identifies with them, such as friends or self-selected peers, and already emulates them in other ways.

OPower (formerly Positive Energy) has taken another approach by analyzing utility company data and adding messaging to utility bills that compares customers to efficient neighbors. The company also gently prods customers to make no- and low-cost behavioral modifications to conform. The approach essentially transforms the utility bill into a teacher’s report card and well-meaning nudge, but I wonder how effectively it motivates consumers to deepen their commitment to energy efficiency, like by investing thousands of dollars in home performance renovations.

Perception of energy efficiency as a “Big Brother” utility-backed priority

In human communications, who is saying something is usually far more important than what is being said. Unfortunately, utility company brands are typically faceless, boring, and irrelevant. Decades of television advertising and direct mail campaigns in some states have trained consumers to associate energy efficiency with utility companies. Consequently, consumers process conventional energy efficiency outreach as “the boring old utility company bugging me again.”

Instead of focusing on transforming their brands at this time of unprecedented concern over privacy and the environment, utility companies are taking on major reputation risks by treating their customers’ energy consumption data like it is proprietary, by pressuring their customers to conform to fstandards and by considering default control of in-home appliances and HVAC systems via smart grid technology.

All these strategies expose the already lackluster brands of most utility companies to significant reputational risk, principally in the form of customer backlash. Look no further than PG&E’s PR fiasco with its Bakersfield smart meter rollout. Utility companies need to learn to navigate today’s hyper-connected community networks if they aim to convince consumers to embrace smart meters and energy efficiency.